Performance trends of Ubiquitous AI <3858>.

2024 FY Performance Overview Consolidated performance for FY3/2024 of G-7 Holdings <7508> was 192,992 million yen in increased operating income of 9.1% over the previous year, and increased ordinary income of 7.4% to 7,318 million yen, and attributed to the parent company's net income of 5,175 million yen, an increase of 35.3% over the previous year. Sales were driven by the Business Supermarket Business and the Meat Business, and continued to set a new record high, exceeding the company's plan by 4.3%. However, in terms of profits, the automobile-related business was affected by a decrease in profits due to poor sales of winter tires due to a warm winter, and could not reach the company's plan, it turned to a profit increase for the second time due to the growth of other businesses centered on the Business Supermarket business. The sales cost ratio has increased by 0.8 points over the previous year due to changes in the sales composition ratio; however, the selling, general and administrative expense ratio decreased by 0.7 points due to the effect of increased earnings, and the operating margin decreased by 0.1 points to 3.6%. The main reasons for the increase/decrease of selling, general and administrative expenses were a decrease of 600 million yen in energy costs due to subsidies from rising electricity prices, and an increase of 1 billion yen in labor costs due to improvements in employee treatment and increased education costs. In addition to this, depreciation expenses increased by nearly 600 million yen due to rising construction material costs and rising costs of opening stores etc. The EBITDA margin has increased by 0.1 points from the previous year. Also, the reason for the large increase in the net income of the parent company's shareholders attributable to the current period is due to the elimination of 500 million yen in retirement benefits paid to executives that were recorded as special losses in the previous year, a decrease of 455 million yen in impairment losses, and a gain of 127 million yen on the sale of investment securities in FY3/2024. Changes in the ratio of revenues - while the revenue composition ratio increased by 0.8 points from the previous year, the selling, general and administrative expense ratio decreased by 0.7 points due to the effect of increased earnings, and the operating margin decreased by 0.1 points to 3.6%. The main factors affecting selling, general and administrative expenses were a drop of 600 million yen in energy costs due to subsidies from rising electricity rates and an increase of 1 billion yen in labor costs due to increases in treatment and education expenses for employees. Depreciation expenses also rose by just under 600 million yen due to increased costs of construction materials and opening new stores. The EBITDA (earnings before interest, taxes, depreciation, and amortization) margin rose 0.1 points from the previous year. Lastly, the reason for the increase in the net income of the parent company's shareholders attributable to the current period was due to the elimination of the 500 million yen for executive retirement bonuses paid in the previous period, the reduction of impairment losses by 455 million yen, and the realization of gains on investment securities of 127 million yen in FY3/2024.

Consolidated performance for the year ending March 2024 increased revenue by about 1.8 times compared to the previous year to JPY 347,800 million (+79.5% YoY), operating income of JPY 710 million (loss of JPY 840 million in the previous year), ordinary income of JPY 870 million (loss of JPY 760 million in the previous year), and net income attributable to parent company shareholders of JPY 320 million (loss of JPY 148 million in the previous year). Subsidiary LightStone, which was converted to a subsidiary in April 2023, had annual sales of JPY 8,830 million, and GrapeSystem, which was converted to a subsidiary in October of the same year, had half-year sales of JPY 5,270 million, making a significant contribution to sales growth. The merger and acquisition of the two companies, which have a business history of nearly 30 years, contributed to the sharing of management resources such as technology, trading partners, and human resources, and greatly strengthened business growth and infrastructure. Although the proportion of revenue from sales to customers manufacturing automotive-related equipment exceeds 30%, confusion in semiconductor, automobile, and household appliance supply chains due to the COVID-19 pandemic and the Ukrainian situation also acted as a tailwind. Operating profit was also improved by the increase in one-time payments at contract signing for new contracts, the increase in sales revenue from commissioned development, and the increase in unit price, resulting in a profit of JPY 123 million solely for the company, and LightStone's profit of JPY 27 million, surpassing the previous year by JPY 155 million and landing in the black. The actual operating profit, including goodwill amortization expenses of JPY 66 million, was JPY 138 million, which was JPY 222 million higher than the previous year, indicating that profitability was enhanced. However, although sales exceeded the revised plan announced in February 2024 by JPY 350 million, operating income fell short of the plan by JPY 780 million. This was due to the loss of the value of assets that GrapeSystem had recorded before consolidation, which was processed as an unplanned expense, resulting in a loss of JPY 33 million, and net income for the period was JPY 32 million.

2.Business segment trends (1) SP business QuickBoot (QB: high-speed startup product), which is the company's main product and a major part of the SP business, was mainly sold to loyalty customers in automotive devices and overseas household appliances, but decreased by 18.6% compared to the previous year to JPY 324 million due to the discontinuation of some existing customer products. The database products (DB) increased by 46.4% to JPY 101 million due to an increase in royalty from industrial equipment customers and the acquisition of new development cases with commissioned development. For the Embedded Platform Products (EP), one-time payments at contract signing and commissioned orders for automotive equipment, medical and industrial equipment are doing well, resulting in an increase of 23.0% to JPY 187 million. GrapeSystem products (GS) recorded sales of JPY 77 million, mainly from sales and one-time payments at contract signing to existing and new customers of printer-related products and voice codec products. Operating profit was supported by the growth of commissioned development and commissioned orders in the existing business, excluding GrapeSystem, improving by JPY 40 million to a profit of JPY 17 million. It seems that strengthening digital marketing utilizing WEB and SNS, such as the enhancement of the company's website, also worked by increasing access and inquiries via the web. Demand for automotive ECU microcontrollers, static code analysis tools and services for analyzing bugs in software, and IoT device security verification tools and services are doing well, and sales of the existing SD business exceeded the previous year by JPY 131 million to JPY 1,137 million. Combined with GrapeSystem's sales of JPY 105 million, total sales were JPY 1,242 million, up 23.4% from the previous year. There was also an exchange rate gain effect due to the yen depreciation, as well as an increase in royalty from existing customers, new customer acquisition of IoT device security verification tools and services, and an increase in commissioned development sales related to product sales. Operating profit improved by JPY 78 million from the previous year, but remained at a loss of JPY 14 million.

Sub-segment trends (1) SP business

- Sales of QuickBoot (QB), the company's main product with a large weight in the SP business, mainly come from loyalty customers in automotive devices and overseas household appliances. However, sales decreased by 18.6% compared to the previous year to JPY 324 million due to the discontinuation of some existing customer products. - Database products (DB) increased by 46.4% to JPY 101 million due to an increase in royalty from industrial equipment customers and the acquisition of new development cases with commissioned development. - Embedded Platform Products (EP) achieved good results with one-time payments at contract signing and commissioned orders from existing customers in automotive devices, medical and industrial equipment, and recorded sales of JPY 187 million, up 23.0% YoY. - GrapeSystem (GS) recorded sales of JPY 77 million, mainly from sales and one-time payments at contract signing to existing and new customers of printer-related products and voice codec products.

(2) SD Business

Sales of existing SD business exceeded the previous year by JPY 131 million to JPY 1,137 million, driven by the strong demand for automotive ECU microcontrollers, static code analysis tools and services for analyzing bugs in software, and IoT device security verification tools and services. Combined with GrapeSystem's sales of JPY 105 million, total sales were JPY 1,242 million, up 23.4% YoY. There was also an exchange rate gain effect due to the yen depreciation, as well as an increase in royalty from existing customers, new customer acquisition of IoT device security verification tools and services, and an increase in commissioned development sales related to product sales. Operating profit improved by JPY 78 million compared to the previous year, but remained at a loss of JPY 14 million.

(3) SS Business

Sales of existing SS business increased slightly by JPY 7 million YoY to JPY 319 million, driven by strong growth in commissioned development. Combined with GrapeSystem's sales of JPY 344 million, total sales were JPY 663 million, up 112.6% YoY. Operating profit improved by JPY 38 million from the previous year to JPY 71 million due to the licensing fees for automotive devices related to Aim's data content "YOMI" and the growth of commissioned development and commissioned orders in the existing business. However, due to GrapeSystem's loss of JPY 29 million, net income for the period was JPY 9 million above the previous year.

(4) DA Business

The company's main package software products for educational institutions, government research institutions, and corporate survey departments are progressing smoothly. In the first quarter, there was a large order for government agencies, and revenue exceeded the plan by 63 million yen to reach 883 million yen, while operating profit also exceeded the plan by 27 million yen to reach 26 million yen.

3. Financial Condition and Management Indicators

At the end of the fiscal year ending in March 2024, total assets increased by 911 million yen. Due to the consolidation of two subsidiaries, accounts receivable and contract assets increased by 414 million yen, and goodwill increased by 442 million yen. On the other hand, accounts payable and contract liabilities increased by 221 million yen, and long and short-term borrowings increased by 286 million yen. Although it is effectively debt-free management, the level of cash and deposits (cash and deposits + marketable securities of current assets) has been maintained by maintaining the borrowing of two subsidiary companies, while reserving growth investment funds. In addition, with the increase in personnel, liabilities related to bonus reserves and retirement benefits increased by 197 million yen. While net assets totaled 32 million yen due to net income for the period, other securities valuation difference decreased by 9 million yen, resulting in a decrease of 23 million yen. The self-capital ratio was 62.5%, 19.2 points lower than the previous period.

At the end of the fiscal year ending in March 2024, cash and cash equivalents decreased by 113 million yen compared to the previous fiscal year, but remained at a level of 1,401 million yen necessary for growth investment. In addition to an operating cash flow of 171 million yen, including a goodwill depreciation expense of 66 million yen for two consolidated subsidiaries added to pre-tax net income of 128 million yen, investment cash flow also had an income of 132 million yen due to the sale of investment securities held by LightStone. Together with the current deposits of 90 million yen, they were used to repay short-term borrowings of subsidiary companies, totaling to 318 million yen.

(Written by FISCO Guest Analyst Akira Matsumoto)